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A bond with a coupon rate of 5.25 percent, semi-annual payments, face value of $1000, and 10-year maturity is trading at a YTM of 2.50%.

A bond with a coupon rate of 5.25 percent, semi-annual payments, face value of $1000, and 10-year maturity is trading at a YTM of 2.50%. Because of some announcements made by the Fed Chairman, this bond now starts trading at a YTM of 5.50%. You are calculating the interest risk of the bond. You do this by first considering a 1% increase in YTM from 2.50% to 3.50%. Then you do the same, considering a change in YTM from 5.50% to 6.50%. Your calculations show that:

A.

None of the above

B.

The interest rate risk of the bond increases, from -7.68% to -7.32%

C.

The interest rate risk of the bond increases, from -14.11% to -12.70%

D.

The interest rate risk of the bond declines, from 14.11% to 12.70%

E.

The interest rate risk of the bond declines, from 7.68% to 7.32%

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